Negative Equity in the San Diego Housing Market

In San Diego, 16 percent of homeowners will become renters, according to the study

This measure assumes that homeowners who owe more than their homes are worth — i.e. negative equity — are in effect renters.

Since the homeownership gap reflects the extent of negative equity in the housing market, it is also a gauge of the potential downward pressure on the offcial homeownership rate. Assuming that house prices do not appreciate over the next several years, negative equity households will very likely convert to renters when they move out of their current homes because they will be unable to save enough to cover the negative equity, the transaction costs of selling their existing home, and a down payment on another home. As these transitions from owning to renting take place, the homeownership gap will narrow, with the offcial homeownership rate dropping toward the effective rate.

The official rate of homeownership in San Diego is 55 percent. But the Fed’s analysis of federal loan data shows that only 39 percent of homeowners will get some money back when they sell.

The difference between these two numbers yields the homeownership gap. And barring a huge rise in prices, that’s where we are headed.

It’s bad, and it may even be worse. According to the paper, these numbers may actually understate the extent of the problem.If you use Case-Shiller’s numbers, only 35 percent of San Diego homeowners have positive equity. So the gap grows to 20 percentage points.

This has far-reaching implications:

Consider, for example, that the Case-Shiller-based effective homeownership rates for … Detroit, New York City, San Diego, and San Francisco are all under 50 percent. That is, the median household in these areas is in a negative equity position and no longer has strong financial incentives to behave as an owner. While the effects will vary with the distribution of negative equity households across the municipalities within these metro areas, a high share of these households could result in reduced maintenance of the housing stock, an increased risk of housing vacancies, and less stable neighborhoods over time—developments that could have repercussions for local law enforcement. Moreover, the predominance of “non-homeowners” in these metropolitan areas could lead to a decline in citizen participation in local affairs, with a concomitant loss of vigilance over the quality and ef?ciency of public services and institutions.